Pioneering Portfolio Management by David Swensen

As far as I can tell (just a guy who's never worked in the industry), Swensen is fairly candid about how the Yale endowment (under his management) sees the world and how it invests its money. For a short 300 page book, he touches upon what he needs to in order to be complete, but as always, volumes more could have been written (e.g. on managing investment advisers, his perspective boils down to hiring ones that you enjoy working with, who enjoy telling you about their portfolio, and who work hard. There's more, obviously. ;).

Yale's endowment grew from ~$1 in ~1985 to ~$7B in 2000. That's over 13.8% per year (in the book he says it's over 16%, which means the ~$1B was closer to 800M), which is a great record. But that record was almost nixed early on by the Yale endowment trustees. Around two years into his new job, the US equities market completely tanked (1987) and several trustees were livid that Swensen would suggest rebalancing the portfolio (and buying more stocks). The US stock market rebounded, Swensen got to keep his job, and we got to read his book.

To build Yale's portfolio, Swensen uses mean-variance optimization (financese for finding the lowest risk position given a desired rate of return and a list of possible investments). The important part is the list of possible investments, and Swensen debriefs us on traditional endowment investments (stocks, bonds) and alternative investments (absolute return, real estate, private equity). From the chosen allocation (say 20% stocks, 10% bonds, 30% private equity, 20% real estate, 20% absolute return), Swensen's team then finds the best value for their investment dollar in each asset class.

This is a very readable introduction to massive portfolio management for endowments (and others, perhaps), replete with tales of how retail get gouged by Wall St. The only thing wrong with it is that he likes the word 'eleemosynary' too much. ;)